Scotiabank CEO says rate hikes best tool to avert housing bubble

Andrea Hopkins

3 Min Read

TORONTO (Reuters) - Canadian policymakers should raise interest rates if they fear a bubble is forming in the nation’s housing market rather than imposing more regulations on Canada’s big banks and mortgage lenders, the head of Bank of Nova Scotia (BNS.TO) said on Thursday.

The logo of Scotiabank is seen at a branch in Toronto November 9, 2007. REUTERS/Mark Blinch

Reacting to a slew of rule changes that the federal government has made over the past five years to tighten mortgage lending, Scotiabank Chief Executive Rick Waugh said there are better tools to guard against housing bubbles.

“It’s not an underwriting or credit problem, it’s the fact that (low) interest rates do cause bubbles,” Waugh told reporters following a speech in Toronto. “I do not think there is a bubble, but if you’re really concerned, and you’re a policymaker, you know what the right thing to do is? Raise interest rates.”

More than a decade of rising prices and sales have sparked concerns that a U.S.-style housing bubble may have formed in Canada.

The market paused briefly in 2009 during the financial crisis. And in 2012 it slowed dramatically after the federal government tightened mortgage lending rules, including shortening the maximum length of government-insured mortgages.

But it has since regained steam, prompting a debate over whether it has actually managed a soft landing or is still due for a crash.

Waugh, who steps down as CEO in November after a decade at the helm of Canada’s third-largest bank, said both Canadian and global bank regulators have focused on preventing a recurrence of the mistakes of the past rather than on preparing for problems in the future.

Canada’s big banks emerged relatively unscathed from the global financial crisis of 2008-09, buoyed by strong capital ratios and conservative lending standards. These included holding the bulk of their residential mortgages on their books rather than securitizing them as was done in the United States.

Waugh, who is due to be replaced by Scotiabank President Brian Porter, said the Toronto-based bank will continue to focus on organic growth but is well-positioned to take advantage of opportunities for acquisitions if they come up.

“The most important thing that we have is $3-$4 billion in retained earnings after dividends to our shareholders, because we made a 17 percent return on our capital, and we grow, we increased, the dividend, and we can look for opportunities to hopefully lend, but also to maybe acquire,” he said.

“Priority No. 1 is organic growth. Acquisitions are not in our game plan. But we have the wherewithal and the experience to be opportunistic if that is required.”